Working Paper: NBER ID: w29720
Authors: Michael Sockin; Wei Xiong
Abstract: We examine decentralization of digital platforms through tokenization as an innovation to resolve the conflict between platforms and users. By delegating control to users, tokenization through utility tokens acts as a commitment device that prevents a platform from exploiting users. This commitment comes at the cost of not having an owner with an equity stake who, in conventional platforms, would subsidize participation to maximize the platform's network effect. This trade-off makes utility tokens a more appealing funding scheme than equity for platforms with weak fundamentals. The conflict reappears when non-users, such as token investors and validators, participate on the platform.
Keywords: Tokenization; Digital Platforms; User Control; Decentralization; Utility Tokens
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tokenization (Y60) | user protection (D18) |
| absence of owner with equity stakes (G32) | user control (Y60) |
| tokenization (Y60) | user participation (C90) |
| tokenization (Y60) | social surplus (D69) |
| tokenization (Y60) | incentives for user participation (O36) |
| hybrid schemes (C71) | user exploitation (O36) |
| tokenization (Y60) | network effects (D85) |